WASHINGTON _ The New York biotechnology investment firm D.Blech & Co. suffered a liquidity crisis on Thursday as its capitalreserves dipped below federally regulated levels and it ceased tradingactivities on NASDAQ.The news caused the stock prices of many Blech-financed companiesto plummet _ a portfolio of 11 of the firm's biotechnology concernslost more than $168 million in market capitalization in the course of theday, more than 30 percent of their combined market valuation. (See theadjoining chart for details.)D. Blech & Co. lost access to NASDAQ's Automated ConfirmationTransaction (ACT) trading system after its clearing firm, Bear Stearns& Co., removed it from the system. Without the financial backing of aclearing firm, D. Blech cannot post bids or offers on securities.Bear Stearns spokeswoman Hannah Burns told BioWorld that "wehave not severed our relationship with D. Blech as of yet; we areevaluating our ongoing relationship." She did not disclose why BearStearns took the action but it was clear from other news that atemporary capital crisis at D. Blech is the cause.D. Blech informed the National Association of Securities Dealers onThursday that it was not in compliance with the Securities andExchange Commission's (SEC) net capital rules. SEC net capital rulesrequire that a brokerage house maintain a certain level of net capital(assets at liquidation value) in order to do business.At the end of the day on Thursday, a spokeswoman from Blech'spublic relations firm, Lori Zaslow, told BioWorld that D. Blech was"not yet in compliance" with SEC net capital requirements but that(David) Blech was "meeting with people this evening to get back incompliance." She insisted that D. Blech's relationship with BearStearns was "good" and that D. Blech hopes to be "back in businesswith Bear Stearns."Sources said that D. Blech & Co. has seen its assets, mainlybiotechnology stocks, shrink ever smaller as stock prices in the sectorhave been on a continuous nose-dive. When the SEC calculates the netcapital of a brokerage firm, it values the firm's cash and securities,among other things. However, the SEC shaves a percentage off thecurrent market value of publicly traded stocks (known as a "haircut")when it adds up the total.Blech Sold $28.7M In Biotech StocksA small firm such as D. Blech with a large percentage of its assets inthe form of securities faces increased risks in a prolonged bear market.Cracks in the walls of the Blech biotechnology empire have beenwidening all year. Indeed, a survey of trading activity from Jan. 1through July 17 of 1994 (done by Fort Lauderdale, Fla.-basedCDA/Investnet, a firm that tracks insider trading) reveals that D. Blechhas been a net seller of biotechnology stocks in that period to the tuneof $28.7 million.In 1994, D. Blech has unloaded its positions in Bio-TechnologyGeneral Corp. (selling 5.9 million shares for roughly $16 million),NeoRx Corp. (selling 3.3 million shares for roughly $14 million), andEnvirogen Inc. (selling 1.5 million shares for about $2 million). Inaddition, D. Blech sold its 13 percent stake in Neurogen Corp.(approximately 1.2 million shares, price unavailable at press time) inJuly.Heavy trading activity in Ecogen Inc.'s stock on Thursday caused someto speculate that Blech is unloading his position in that company aswell. About 12.4 million shares (70 percent) of the company's 17.8million outstanding shares changed hands _ an increase of 4,522percent over the average daily trading volume of 275,102 shares. As ofApril 1, 1994, Blech owned about 11.7 million shares of Ecogen stock.Insiders speculate that the stock sales have been an attempt by thetroubled firm to raise cash. But even as D. Blech has unloaded stocksright and left, it has engaged in a frenzy of underwriting activity in1994. While traditional heavy hitters in the initial public offering (IPO)market, like Hambrecht & Quist Inc., have been inactive, D. Blech hasacted as the sole underwriter for an astonishing eight IPOs in 1994. Thefirm has raised a total of $133 million in those offerings. (For more onBlech's IPO strategies, see BioWorld Today, April 25, 1994, p. 1.)In addition, at least four Blech-led public equity offerings are currentlywaiting in the wings, including planned IPOs for ArcturusPharmaceutical Corp. (filed July 15) and Parnassus PharmaceuticalsInc. (filed May 23, amended June 7) and follow-on offerings forPharmos Corp. (filed Aug. 22) and Interferon Sciences Inc. (filed May13, amended Aug. 10).He Tried To Defy GravityMerrill Lynch & Co. analyst Jeffrey Casdin told BioWorld that Blech'sunderwriting activity in 1994 has been a doomed attempt to "defygravity" by bucking market forces."Market forces have been telling us that there are too manybiotechnology companies demanding too much money and that weneed more mature, later-stage companies coming out at reasonablevaluations," said Casdin. "This is a guy [David Blech] who has tried todefy that trend using unsound methods. A lot of these companiesprobably came public prematurely."BioSepra Inc. of Marlborough, Mass., went public in a D. Blech-ledoffering last March that raised $21 million. William Rich, BioSepra'sCEO until a few weeks ago and now vice chairman of the firm's boardof directors, told BioWorld that he first learned of Blech's financialwoes when BioSepra stock began dropping early on Thursday.Rich said he immediately called D. Blech and was told that theinvestment firm's relationship with Bear Sterns had been terminatedbut that the setback was a temporary one. He said that D. Blech'sprincipal, financier David Blech, has weathered several financialstorms successfully so far this year."He always seems to recover, he's a very determined, resourceful guy,"said Rich. "If anyone can survive an ordeal like this, it's him."But other sources who asked not to be identified were less confidentabout Blech's prospects. "Mark my words, David Blech is going to bebesieged by lawsuits from his customers and by visits from the SECand the IRS," predicted one analyst. If short sellers smell blood, theanalyst continued, they could target Blech stocks causing prices to sinkeven further, severely devaluing Blech's assets."Raising money is going to be a long-term problem for Blech," saidanother source. "There is no longer a liquid market for many of thesestocks and that throws Blech's financial viability into question." n

-- Lisa Piercey Washington Editor

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